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Facts
The assessee, a builder, showed sundry creditors for more than three years. The AO added Rs.38,16,99,353/- u/s.68 treating them as unexplained cash credits. Separately, interest expenditure of Rs.1,35,37,339/- on non-convertible debentures for a project was disallowed by the AO and confirmed by the CIT(A).
Held
The Tribunal held that the addition u/s.68 for sundry creditors was erroneous as these were not fresh cash credits. For the interest expenditure, it was held to be allowable u/s.36(1)(iii) as it was for a business purpose and not a qualifying asset under IND AS 23. The Revenue's appeal on disallowance of interest u/s.14A was dismissed.
Key Issues
Whether sundry creditors of three years can be treated as unexplained cash credit u/s.68? Whether interest on borrowed funds for a project which is not a qualifying asset can be disallowed?
Sections Cited
14A, 41(1), 68, 36(1)(iii), 28, 10(2)(iii)
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Income Tax Appellate Tribunal, ‘C’ BENCH
Before: SHRI AMIT SHUKLA & SMT RENU JAUHRI
& 5501/Mum/2024 Paranjape Scheme Construction Limited आदेश / O R D E R PER AMIT SHUKLA (J.M): The aforesaid appeals have been filed by the Revenue as well as by the assessee against order dated 20/08/2024 passed by NFAC, Delhi for the quantum of assessment passed u/s.143(3) for the A.Y.2021-22.
The Revenue in the grounds of appeal has challenged the deletion of disallowance u/s.14A and assessee has challenged deletion of confirming addition of Rs.38,16,99,353/- u/s.41(1) and disallowance of interest expenditure of non-convertible debentures of Rs.1,35,37,339/-.
3. We will take up assessee’s appeal first.
4. The brief facts qua the first issue raised in assessee’s appeal are that the ld. AO during the course of assessment proceedings noted that assessee had shown liabilities under the head ‘sundry creditors’ for more than three years. As per the details there were 37 entries with different names and addresses and ld. AO noted that in some of the cases addresses and PAN were the same and many entries did not have either PAN or address or both accordingly, ld. AO held that all these sundry creditors are liable to be added u/s.68 as assessee has failed to discharge its onus to prove the identity, creditworthiness and genuineness of the transactions and added the amount of Rs.38,16,99,353/-. Thus, liability shown under the head ‘sundry & 5501/Mum/2024 Paranjape Scheme Construction Limited creditors’ have been added as ‘unexplained cash credit’ u/s.68 during the year.
5. Before the ld. CIT (A) assessee submitted that ld. AO has wrongly made addition u/s.68 by treating the creditors as ‘cash credit’ and submitted that there was no cash credit during the year as all the creditors were old outstation credit creditors.
6. However, in the course of appellate proceedings before the Id. CIT(A), the assessee submitted rectified details of alleged trade creditors such as PAN, address and movement of creditors for retention money, advertisement expenses, site related expenses, general expenses, staff related expenses and other creditors. The assessee had also furnished invoices, work orders, ledgers, bank statement etc, of trade creditors on sample basis (for the captioned year and AY 2022-23) and rectified specific discrepancies pointed by the Id. AO in order to prove genuineness of trade creditors alongwith submission dated 29.07.2024. Further, in the course of personal hearing through Video Conferencing (VC) before the Id. CIT(A), the assessee had briefed the entire issue along with detailed explanation of submission and documents submitted by the assessee before the Id. CIT(A) in order to prove genuineness of creditors. In the said VC, the Id. CIT(A) asked the assessee to furnish all the details/documents filed before the Id. AO with respect to the captioned ground, which the assessee duly submitted on 02.08.2024. The ld. CIT(A) held that ld. AO has treated these entries as cash credit proceeded and concluded that cash credit & 5501/Mum/2024 Paranjape Scheme Construction Limited appeared in the books of account are not proved. He further noted that ld. AO has discussed this issue in detail and has pointed out discrepancies in respect of the creditors which was not explained satisfactorily by the assessee and the genuineness of the creditors was not proved. However, he held that outstanding credit liabilities should be added u/s. 41(1) as cessation of liability holding that these are non-existing liability and he confirmed the addition u/s.41(1).
We have heard both the parties and perused the relevant finding given in the impugned order. The assessee is a builder and has shown sundry creditors worth more than Rs.343 Crores and work-in-progress of more than Rs.1600 Crores and total sales of around Rs.153 Crores. The ld. AO has shortlisted sum 378 entries from the list of sundry creditors and has made the addition u/s.68 on the ground that either there was a wrong address, wrong PAN and out of Rs.343 Crores he has added sum of Rs.38,16,99,353/-. First of all, if there is an outstanding liability from the earlier years the addition could not have been made u/s.68 as if there is a fresh cash credit receipt during the year. Thus, addition u/s.68 made by the ld. AO itself was erroneous in law and on facts.
The reason being these are all creditors in respect of retention money of contractors, advertisement expenses, site related expenses, general expenses, staff related expenses etc. All these expenses are either allowed by ld. AO in computing the total income or are allowed to be carried forward as part of WIP. There & 5501/Mum/2024 Paranjape Scheme Construction Limited is no expenses disallowed whatsoever. Therefore, there is no case whatsoever for upholding the disallowance under section 68. The ld. CIT(A) have invoked Section 41(1) and upheld the same disallowance under section 41(1) without giving any show cause notice or opportunity of hearing in this behalf. In fairness, this issue deserved to be set aside for verification of the documents and the accounting entries and other legal aspect of 41(1) disallowance. If the matter is set aside to file of Ld. CIT(A), He may have to call for a remand report because the Ld. AO has not examined the issue from the point of view of section 41(1). The Ld. DR at the time of hearing made a mention of practical difficulties faced by CIT(A) to get remand report from the AO in the faceless regime and therefore he submitted his preference of sending the matter back to ld. Assessing Officer for examination of Section 41(1). The ld. CIT(A) without considering the nature of sundry creditors and simply because certain sundry creditors were outstanding for 2-3 years, he has held that it amounts to cessation of liability. These sundry creditors are in the nature of expenses for which detailed additional evidences have been filed before us. It had been stated that ld. CIT (A) has not given any opportunity to submit the documents without even confronting, has himself applied Section 41(1). Assessee has filed ledger accounts and bank statement for the subsequent period wherein the payments were made to all the sundry creditors. Thus, no addition u/s.41(1) could have been made by the ld. CIT(A) without even asking for the details and simply because they are
On the other hand, ld. CIT DR submitted that matter should be restored back to the file of the ld. AO to examine whether liability has been discharged in the subsequent year as claimed by the assessee.
From the perusal of the order it is seen that ld. CIT(A) has nowhere even asked for the details as to why provision of Section 41(1) should be invoked merely because assessee has shown liability under the head ‘sundry creditors’ that does not mean it is a cessation of liability u/s.41(1). Before us, the assessee has filed voluminous evidence about the nature of expenses incurred appearing as ‘sundry debtors’ and the payments made in subsequent years which has been stated to be allowed for becoming part of WIP. Since all these evidences have been filed before us therefore, the matter is restored back to the file of the ld. Assessing Officer to examine these details and to examine the applicability of Section 41(1). Accordingly, this ground is partly allowed for statistical purposes.
Now coming to the second issue, the brief facts are that during the year assessee has provided interest of Rs.36,31,20,951/- against issue of non-convertible debentures (NCDs). The assessee has claimed the interest expenditure on NCDs u/s. 36(1)(iii).
Financial WIP- WIP-stamp/ WIP- WIP- WIP- Total WIP Deposit given Total Outflow Year Betterment Registration Constructi Administrative Employee to Land owners on Cost Cost FY 15-16 5,75,740 60,30,000 8,58,014 1550 29,907 74,95,211 5,00,00,000 5,74,95,211 FY16-17 - - 50,000 200 - 50,200 50,200 FY17-18 - - 75,000 - - 75,000 75,000 FY 18-19 39,790 - - - - 39,790 39,790 FY 19-20 76,10,624 76,10,624 76,10,624 - - - - Total 6,15,530 1,36,40,624 9,83,014 1,750 29,907 1,52,70,825 5,00,00,000 6,52,70,825
The ld. AO however, observed that the borrowed funds have been diverted for non-business purpose. The ld. AO issued a show-cause notice as to why project ‘Aayena’ at Wagholi is not a qualifying asset as INDAS 23 and that expenditure is related to same project should not be capitalised. In response, assessee submitted that the total borrowing cost of Rs.1,35,37,339/- and the said project ‘Aayena’ during the year is not a qualifying asset as per INDAS 23 and accordingly, interest has been charged to profit and loss account. The assessee has entered into a registered agreement in June 2015 for development of land at village Wagholi, district Pune admeasuring 12.35 acres. The company had paid initial deposit of Rs.5 crores to the land owners in the year 2015-16. As per the said agreement there was a clear understanding of the owners of the property that litigation regarding approach road to be resolved by the owner of the property, however, despite that for the last several years there was hardly any work done for the project. It has been & 5501/Mum/2024 Paranjape Scheme Construction Limited stated that the said development project got delayed for certain reasons, the assessee had till the end of previous year relevant to captioned assessment year, in totality incurred a sum of Rs. 6,52,70,825 for the said Wagholi Project. Out of the aforesaid payments, Rs. 5,00,00,000/- had been given to the landowners as "deposit", somewhere in FY 2015-16. Such deposit is, indeed, in ordinary course of construction business. Balance expenditure of Rs. 1,52,70,825/- (as-per-details in the table in-para-2-3- above) was carried forward as part of Work-In-Progress ("WIP"). The majority expenses were in WIP which was done in the initial stage and differential stamp duty payment was also paid in F.Y.2019-20. The assessee has incurred expenses relating the consultants for land surveyor, architect and environmental consultant and also towards fire protection fund to get the provisional no objection certificate from the Government of Maharashtra. Ld. AO held that all the operating costs are to be capitalised as part of the cost of a qualifying asset and it is probable that they will result in future economic benefits and the cost can be measured reliably. Assessee’s claim for no work done for the last seven years is not acceptable. The initial ground work like land agreements, land surveys conceptualizing detailed project reports, appointing architects are the very preliminary works without which the construction would not start. These preliminary works for the last several years are very much part of development activity of the project hence, the project qualifies to be capitalised as qualifying assets and this needs to be capitalised. Accordingly, he held that to the extent of expenditure & 5501/Mum/2024 Paranjape Scheme Construction Limited incurred for Rs.5 Crores proportionate to interest expenditure of Rs.1,35,87,339/- on Project ‘Aayena’ cannot be allowed u/s.37.
The ld. CIT(A) too has confirmed the addition holding as under:-
From the above submission I find that the amount of 5 crores on which the interest expenses are claimed by the appellant was paid to land owners as deposit during FY 2015-16 and entire land cost including deposits and other expenses incurred so far have been shown under the head WIP since said project namely 'Aayena is not yet started. The appellant contended by relying on various decisions that the interest paid on borrowings which are lying in the form of stock in trade is allowable as a revenue expenses, hence requested to allow the expenditure. However I find that this project is not yet started and the entire expenses incurred till the year are shown as WIP Thus I find that the interest expenses claimed by the appellant are of capital expenditure nature being part of land cost shown in WIP of the project which is not yet started. Therefore the action of the AO of disallowing such expenses is confirmed and ground raised by the appellant is dismissed.
After hearing both the parties and on perusal of the material placed on record, it has been stated that out of the monies borrowed through NCDs assessee has given Rs.5 Crores as refundable deposit as per the development agreement and such deposit has been stated to be purely for the purpose of assessee’s business. Since this was a refundable deposit which was to receive back, it cannot be held that any interest has to be disallowed. The balance expenses were towards stamp duty, architecture, surveyor report; same was purely for the purpose by the business. The ld. AO has treated the Waghole Project on & 5501/Mum/2024 Paranjape Scheme Construction Limited which interest cost of Rs.1,35,37,339/- has treated as ‘qualifying asset’ at the basis for condition mentioned in AS-23.
As per IND AS 23, the borrowing cost which is directly attributable to the acquisition of a provision of a qualifying asset which should be capitalized as part of the cost of that asset. The amount of borrowing cost eligible for capitalization should be determined in accordance with IND AS 23 standards. Other borrowings are recognized as an expense in the period in which they are incurred. The qualifying asset is an asset that necessarily takes substantial period of time to get ready for its intended use or sale. Also the borrowing costs are capitalized as part of the cost of a qualifying asset when it is probable that they will result in future economic benefits. Here in this case interest incurred for the project was not a qualifying asset as on 31/03/2021, because here these expenses are incurred although for the project but project could not progress due to litigation due to various factors and it has also been informed that even the deposit of Rs.5 Crores has also been refunded back to the assessee in the F.Y.2023-24. But assessee had incurred the expenditure which it had intended for the business purpose, i.e., to develop a project and therefore, the payment of Rs.5,74,75,211/- out of total payments of Rs.6,52,70,825/- pertaining to this project has to be treated for the purpose of business. The expenses like stamp duty, registration charges, consultation fees, architect etc., which have been actually incurred during the course of business, then it has to be stated that it is for the purpose of business allowable and any interest & 5501/Mum/2024 Paranjape Scheme Construction Limited payment on the loan for incurring these business expenditure has to be allowed u/s 36(1)(iii) and no disallowance can be made. Since the deposit of Rs.5 Crores was refundable either on completion of the project or here in this case the project was cancelled as assessee has actually received back the amount of Rs.5 Crores, therefore, the payments made through borrowing of NCDs the interest has to be allowed u/s.36(1)(iii). This issue stands covered by the judgment of the Hon’ble Jurisdictional High Court in the case of CIT vs. Lokhandwala Constructions Industries Limited (2003) 260 ITR 579 (Bom HC) which reads as under:-
“4. From the facts found by the Tribunal on record, it is clear that assessee undertook two-fold activities. It bought and sold flats. Secondly, the assessee was also engaged in the business of construction of buildings. The profits from the both the activities were assessed under Section 28 of the Income-tax Act. In this case, we are concerned with the second activity (hereinafter referred to, for the sake of brevity, as "Kandivali Project"). According to the Commissioner, loan was raised for securing land/development rights from the Mandal. That, the loan was utilised for purchasing the development rights, which, according to the Commissioner, constituted a capital asset. According to the Commissioner, since the loan was raised for securing capital asset, the interest incurred thereon constituted part of capital expenditure. This finding of the Commissioner was erroneous. In the case of India Cements Ltd. v. CIT, Madras, reported in 60 ITR Page 52, it was held by the Supreme Court that in cases where the act of borrowing was incidental to carrying on of business, the loan obtained was not an asset. That, for the purposes of deciding the claim of deduction under Section 10(2)(iii) of the Income-tax Act 1922 [section 36(1)(iii) of the present Income-tax Act], it was irrelevant to consider the purpose for which the loan was obtained. In the present case, the assessee was a builder. In the present case, the assessee had undertaken the Project of & 5501/Mum/2024 Paranjape Scheme Construction Limited construction of flats under the Kandivali Project. Therefore, the loan was for obtaining stock-in-trade. That, the Kandivali Project constituted the stock-in-trade of the assessee. That, the Project did not constitute a fixed asset of the assessee. In this case, we are concerned with deduction under Section 36(1)(iii). Since the assessee had received loan for obtaining stock-in-trade (Kandivali Project), the assessee was entitled to deduction under Section 36(1)(iii) of the Act. That, while adjudicating the claim for deduction under Section 36(1)(iii) of the Act, the nature of the expense - whether the expense was on capital account or revenue account -was irrelevant as the Section itself says that interest paid by the assessee on the capital borrowed by the assessee was an item of deduction. That, the utilization of the capital was irrelevant for the purposes of adjudicating the claim for deduction under Section 36(1)(iii) of the Act (See judgment of the Bombay High Court in the case of Calico Dyeing and Printing Works v. CIT, Bombay City-II, reported in 34 ITR 265). In that judgment, it has been laid down that where an assessee claims deduction of interest paid on capital borrowed, all that the assessee had to show was that the capital which was borrowed was used for business purpose in the relevant year of account and it did not matter whether the capital was borrowed in order to acquire a revenue asset or a capital asset. The said judgment of the Bombay High Court applies to the facts of this case.
For the reasons given hereinabove, we answer the above question in the affirmative i.e. in favour of the assessee and against the department. The Appeal is accordingly disposed of. No order as to costs.”
Thus, the interest cost amounting to Rs.1,35,37,339/- for NCDs issued by the assessee for the purpose of Wagholi project is allowable as deduction u/s.36(1)(iii) and treatment given in IND AS-23 will not apply for the present facts. As Wagholi project does not qualify as qualifying asset. Accordingly, this ground is allowed.
& 5501/Mum/2024 Paranjape Scheme Construction Limited 17. With regard to disallowance of interest made u/s.14A, the brief facts are that the assessee had earned exempt income for which it has offered suomoto disallowance of Rs.50,67,419/-. The ld. AO after applying Rule 8D has obtained the disallowance u/s.14A of Rs.2,39,35,603/- after taking suomoto disallowance made by the assessee. The ld. CIT(A) has deleted the addition on the ground that firstly, ld. AO has not recorded his satisfaction before making disallowance u/s.14A and the basis for suo-moto disallowance was on the dividend earned on the investments and those were omitted wherein assessee has not earned any dividend income from the investments.
After hearing both the parties, we find that it is a very well settled that only those investments have to be considered which have yielded dividend income during the year and the assessee has made suo-moto disallowance only on such investment. The disallowance of other investment which has not yielded any exempt income has rightly been deleted by the ld. CIT(A). Accordingly, the appeal of the Revenue is dismissed.
In the result, appeal of the assessee is partly allowed for statistical purposes and the Revenue appeal is dismissed.
Order pronounced on 29th January, 2025.